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China – Japan strife spotlights a strategic U.S. vulnerability

BEIJING – The recent political standoff between China and Japan thrust so-called rare earth minerals – critical to the manufacture of 21st century technology like cell phones and digital cameras to high-tech weaponry – into the limelight as a national security concern for the United States.

Stemming from a dispute over a Chinese fishing boat captain held by Japan, China, which controls 97 percent of processing of the world’s rare earth minerals, reportedly blocked their export to Japan.

The claim was quickly denied by Beijing, but the mere suggestion that China was willing or capable of such an embargo sent shockwaves through U.S. businesses, economic planners and Pentagon strategists.

That’s because a similar embargo against the United States could seriously threaten America’s ability to source elements used in the manufacture of everything from hybrid car engines to the precision laser-guided smart bombs used by the military.

An April 2010 Government Accountability Office study put the shift to Chinese dominance in the rare earth minerals market in stark terms: “The United States previously performed all stages of the rare earth material supply chain, but now most rare earth materials processing is performed in China, giving it a dominant position that could affect worldwide supply and prices.”

The report spells out the consequences of China’s near monopoly of the supply of rare earth minerals, but also notes that rebuilding a U.S. rare earth supply chain could take as long as 15 years and would require “securing capital investments in processing infrastructure, developing new technologies, and acquiring patents, which are currently held by international companies.”

The embarrassing revelation that critical parts for top American military weapon systems such as General Dynamics’s M1A2 Abrams tank and Lockheed Martin’s Aegis SPY-1 radar brought about a call for congressional hearings on the issue, but it could be decades before an American supply chain for rare earth materials is rebuilt.

Change of dominance
The United States was not always so dependent on other countries for its mineral needs.

During the post-World War II era, as the need for uranium for atomic weapons to compete in the Cold War arms race grew, a rush of mineral prospecting took place throughout the southwest United States.

The discovery of sizable deposits of rare earth minerals, like flourocarbonate bastnaesite in the U.S. during the 1940s, proved to be of little use for uranium enrichment for bombs. But an element derived from bastnaesite, europium, was found to be essential for the production of the cathode ray tubes required for early color televisions.

With that, the industry exploded in the United States as major mineral companies like Molycorp Minerals took the lead in the extraction and trade of rare earth metals. Other American conglomerates – notably General Motors, General Dynamics and Lockheed Martin Corp – quickly developed new uses for the metals, among them sophisticated new lasers, night-vision goggles and improved radar.

Despite a wealth of rare earth minerals in the U.S., the manufacture of the minerals has become dominated by China.

In an intriguing report written earlier this year for the Institute for the Analysis of Global Security, researchers looked into the 1995 sale of Magnequench. The company was formed in 1986 by GM to manufacture neodymium-iron-boron magnets – powerful magnets that are used in everything from car engines to electrical power steering.

In 1995, two Chinese companies, likely seeing the potential military application of the product and catching GM as it was attempting to break into the Chinese market, acquired Magnequench for $70 million. The sale was approved by the U.S. government with the stipulation that the buyers keep the company in its hometown of Anderson, Indiana for five years.

The day after that deal expired in 2002, the Chinese company shut down the entire operation, shipped all its manufacturing equipment and resumed operations in China.

The research report noted, “In less than one decade, the permanent magnet market experienced a complete shift in leadership.”

The Magnequench sale represented a titanic shift in the competitive advantage of the United States and set the scene for the loss of America’s manufacturing dominance in the rare earth mineral industry.